Is it time for Apple to buy Netflix?

The movie rental company's shares can be hazardous to your portfolio's health, and its survival hinges on one thing: being acquired.

By TheStreet Staff Aug 3, 2012 10:57AM

By Richard Saintvilus

 

Two weeks ago, as shares of Netflix (NFLX) were trading at $86.65, I asked whether the struggling Internet movie streaming giant can stay afloat and survive the unrelenting assaults it continues to receive not only from rivals such as Amazon.com (AMZN), Time Warner (TWX) and Coinstar (CSTR) (Redbox) but also from those that have yet to fully enter the market -- such as Apple (AAPL) and Google (GOOG).

 

My question was obviously rhetorical, and I followed up that article with another one listing the reasons Netflix couldn't survive those attacks.

 

Since then, the company has done little to dispel doubts about its future, and its shares have dropped 32%. The only question now is how swift the company's demise will be.

 
Netflix did deliver the goods with its earnings and revenue when it reported quarterly results last week. It met its targets and reported profit of 11 cents a share, topping the average analyst estimate of 4 cents. Revenue was $889 million, up from $788.6 million a year earlier.

 

The problem is its outlook and its slowing subscriber growth. The company said that although it expects to remain profitable in the third quarter, it is forecasting a fourth-quarter loss due to international market expansion.

 

Wall Street wasn't impressed, and the stock plunged as much as 13% in after-hours trading.

 

What's more, the company seems to continue to ignore its DVD market. Remember those shiny red envelopes that arrived in the mail? The same ones that sent Blockbuster stores to their grave?

 

Though that model once helped Netflix grow to prominence, the company's recent lack of marketing in that area has caused the service to shed subscribers, and the losses are a drag on the gains in the domestic Internet streaming business.

 

Making matters worse is that the company projects 600,000 to 900,000 more DVD subscribers will cancel the service, while domestic streaming subscribers will increase only 1 million to 1.8 million in the quarter. The full-year guidance for streaming growth is 7 million, a not-so-impressive figure, considering the cancellations on the DVD side.

 

Be that as it may, Netflix insists that it is driven to expand internationally, particularly into areas such as Latin America and continental Europe, even if that expansion wipes out near-term profits. A very disappointing statement, if you ask me. Because for as much as it is trying to expand, it is doing this in markets with severe economic problems.

 

Perhaps a change in focus is warranted until Europe gets its act together -- at least that would be the option for a smart management team.

 

But given Netflix's management's lack of vision, the company's survival hinges on one thing and one thing only: being acquired. I think it is time for Apple to step up and buy Netflix.

 

It is no secret that Apple has television plans. With Netflix's existing subscriber base and popular brand Apple can take over its fledgling business, restore the promise that Netflix once had and immediately light a fire under Google and Amazon. With these three vying for a key spot in the living room, Microsoft (MSFT) also might be compelled to make a bid for Netflix. (Microsoft owns and publishes Top Stocks, an MSN Money site.)

 

The question is how much it would take to make a deal happen. With Netflix currently trading for less than $58 -- down from $300 a year ago -- would Reed Hastings and the board accept an offer of less than $150 per share? It may not be in a bargaining position, however, when its death appears inevitable if it continues to go it alone.

 
Clearly, the company's decision to ignore its DVD delivery model and focus on its streaming service has not proven wise.

 

It would seem that investors agree, based on the recent stock activity.

 

The Netflix narrative is pretty straightforward. The advantages that the company enjoyed at the peak of its DVD rental dominance have evaporated.

 

Within the streaming market, it doesn't have the same leverage. Analysts are aware of this, and some have started to slash 2013 EPS estimates from $2 to 60 cents, a 70% reduction.

 

The stock likely will continue to decline to reflect such a lowered outlook, and it would come as no surprise to me to see shares drop to the $40 to $45 range.

 

This is why I will avoid this stock even though I love Netflix's service.

 

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2Comments
Aug 3, 2012 2:09PM
avatar
The author says "The only question now is how swift the company's demise will be."

I'm not a big Netflix defender.. really I'm not.. but their demise is not even close to being a sure thing.

Please stop trying make buyouts and mergers happen. Competition is good.
Aug 3, 2012 2:04PM
avatar

Jobs Growth..........my a s s

we are looking at 20%+ unemployment and underemployment

20% in California, 26% in Nevada.............

who is Liberal enough to twist the numbers

who do you think we are..................as dumb as you are?

 

Reality check coming up in November.

If Obama keeps his job, YOU will lose yours

If Obama loses his job, YOU will keep yours

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